Uncertainty is killing the global financial markets, but certainty could be even worse
The biggest obstacle standing in the way of the global economic recovery is Europe. Its sovereign debt problems continue to worsen, with Greece slowly inching closer to the edge of the cliff. With each day that passes, its default looks more and more certain. If Greece's fate is essentially determined, then what is Europe waiting for? Why not just allow Greece to default immediately so that banks can take their losses and everyone can move on? While that might provide some certainty to markets, it would mark the beginning -- not the end -- of the crisis.
An Analogy: The U.S. Financial Crisis
In some ways, Europe's situation is comparable to the U.S. banking industry's crisis back in 2008. Just as banks were experiencing serious problems and nearing default, so are several European nations. And just like a few particularly toxic banks threatened to take down the entire industry with them, a few struggling nations could take down the entire European Union.
Like during the financial crisis, contagion is a serious problem. While a handful of big U.S. banks had exposure to toxic mortgage securities that rendered them insolvent (losses would overwhelm their assets), most were experiencing liquidity problems (they merely couldn't roll over their short-term funding). In Europe, solvency could be a problem with Greece, Ireland, and Portugal. But others like Italy and Spain will likely only fail if the fallout from those others triggers their collapse.